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By XE Market Analysis December 9, 2019 4:23 am
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    XE Market Analysis: Europe - Dec 09, 2019

    The pound rallied to new highs as two new polls show the Conservative party extending its lead over Labour. The late debate between PM Johnson and Labour's wannabe PM, Corbyn, was considered a draw, too, according to a poll by YouGov, suggesting that, with three days to go until the UK general election, there is now little change that Labour can close the popularity gap. A poll by BMG found support for the Conservative up a point, and Labour down a point, while a Survation poll found support for the Conservatives up 2 points, and support for Labour down two points. Politicos poll tracker has the Conservatives at 43% support and Labour with 33% support, unchanged over the last week. The Tories lead allows for a margin of error, as a lead of anything over 7% suggests an outright majority at the election. Cable rallied a fresh eight-month high at 1.3181, while EUR-GBP dropped to a 31-month low, at 0.8393. Elsewhere, the other dollar majors and associated cross rates have been holding within their respective Friday ranges. The narrow trade-weighted USD index (DXY) is little changed after rallying nearly 0.5% on Friday following the solidly above-forecast U.S. November jobs report. EUR-USD concurrently settled around 1.1050.60, after dropping on Friday from levels above 1.1100. USD-CAD consolidated around 1.3250 after surging by about a big figure on Friday to a 1.3270 peak, while AUD-USD has settled after rotating lower. Weakness in Chinese export data cast a pall over markets, though most Asian stock markets still managed to eke out gains. Upwardly revised Japanese Q3 GDP data provided an offset. The New Zealand dollar steadied after recent strong outperformance. Two NZ banks, ASB and BNZ, raised their GDP forecasts for the antipodean economy. Prime focus this week will be on the U.S.-China trade front, with the U.S. deadline to hike tariffs on a further $160 bln of imported Chinese goods due to take effect on the upcoming Sunday.

    [EUR, USD]
    EUR-USD settled around 1.1050.60, after dropping on Friday from levels above 1.1100. The decline was driven by dollar gains after the forecast-smashing U.S. November employment report, which saw the 10-year U.S. T-note over Bund yield differential rise by around 3 bp, to near 213 bps. Out of the Eurozone, German trade data today showed a better-than-expected 1.2% rise in German exports in October data, though this has had little impact on the euro. There remains a degree of uncertainty in global markets, with U.S.-China relations deteriorating over Hong Kong just as the two side are trying the limited "phase 1" trade deal that was first announced two months ago. The U.S. deadline to hike tariffs on a further $160 bln of imported Chinese goods is due to take effect on the upcoming Sunday. Any failure to rubber-stamp the phase-1 deal would likely spark a new phase of risk aversion in markets, which in turn would support the dollar as a safe-haven currency. Overall, we retain a bearish view of EUR-USD.

    [USD, JPY]
    USD-JPY failed to sustain gains seen in the immediate wake of Friday's stellar U.S. jobs report, rising to 1 108.92 peak before turning lower and subsequently settling around 108.60. Yen crosses have also traded lower, with EUR-JPY descending into two-week low terrain and AUD-JPY posting a five-day low. While Wall Street rallied strongly on Friday, position-taking has been much more cautious so far today. There remains a degree of uncertainty in global markets, with U.S.-China relations deteriorating over Hong Kong just as the two side are trying the limited "phase 1" trade deal that was first announced two months ago. The U.S. deadline to hike tariffs on a further $160 bln of imported Chinese goods is due to take effect on the upcoming Sunday. Any failure to rubber-stamp the phase-1 deal would likely spark a new phase of risk aversion in markets, which in turn would likely see the safe-haven premium of the Japanese currency rise. Data today showed an unexpected upward revision in Japan's Q3 GDP to 1.8% y/y, up from 0.2% in the previous quarter.

    [GBP, USD]
    The pound rallied to new highs as two new polls show the Conservative party extending its lead over Labour. The late debate between PM Johnson and Labour's wannabe PM, Corbyn, was considered a draw, too, according to a poll by YouGov, suggesting that, with three days to go until the UK general election, there is now little change that Labour can close the popularity gap. A poll by BMG found support for the Conservative up a point, and Labour down a point, while a Survation poll found support for the Conservatives up 2 points, and support for Labour down two points. Politicos poll tracker has the Conservatives at 43% support and Labour with 33% support, unchanged over the last week. The Tories lead allows for a margin of error, as a lead of anything over 7% suggests an outright majority at the election. Cable rallied a fresh eight-month high at 1.3181, while EUR-GBP dropped to a 31-month low, at 0.8393. The pound in the BoE's real trade-weighted measure remains about 7-8% down on levels prevailing ahead of the vote to leave the EU in June 2016, although rallying by over 9% from the multi-decade low that was seen in mid August. The recouperation reflects a pricing-out of risk for a no-deal Brexit. The outcome of this week's general election should not be taken as a certainty. There is the possibility of opposition parties forming a coalition, or the Tories falling short of a majority and forming a coalition with the Liberal Democrats, which have stated that they would only support the party of PM Johnson on the proviso that there was a second referendum on EU membership (which could potentially seen Brexit cancelled).

    [USD, CHF]
    EUR-CHF has settled in the mid 1.0900s after a spell of relatively choppy trading. The cross has managed to base above the three-week seen last Wednesday at 1.0921 after rotating lower from levels above 1.1000. The cross to a degree been correlating with the ebb and flow of global stock markets, with the franc retaining a function as a safe haven currency despite the -0.75% deposit rate in Switzerland.

    [USD, CAD]
    USD-CAD has consolidated around 1.3250 after surging by about a big figure on Friday to a 1.3270 peak following the strong U.S. jobs report. A rise in the U.S. yield advantage over Canadian yields has underpinned the pairing, offsetting the near 6% week-on-week rise in oil prices. Taking a step back, the pairing is continuing to trade near the midway point of a broadly, at times choppy, sideways range that's been seen since July 2018. More of the same looks likely.

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